I work as a Research Scholar at the Center for Health Policy and Inequalities Research at Duke University. I also am an Adjunct Scholar at American Enterprise Institute and Mercatus-Affiliated Senior Scholar. Having been trained in policy analysis at the Pardee RAND Graduate School, I have decades of experience in evidence-based health policy at the federal and state level, specializing in health services regulation and the social burden of illness. I've taught health policy and the politics of health care in the Terry Sanford Institute of Public Policy, the Duke School of Medicine and the Fuqua School of Business at Duke. My latest book is "American Health Economy Illustrated."

The author is a Forbes contributor. The opinions expressed are those of the writer.

The Cost of Health Care: 1958 vs. 2012

Mark Perry has posted some interesting comparison of how prices have plummeted between 1958 and 2012 when measured in terms of the hours of work required to purchase items. He concludes that today’s consumer working at the average wage of $19.19 would only have to work 26.6 hours (a little more than three days) to earn enough income ($511) to purchase a toaster, TV and iPod. The equivalent products (in terms of their basic function, not their quality) would have required 4.64 weeks of work in 1958. In short, the “time cost” of these items has massively declined by 86% in less than 5 decades.

Similarly, Perry calculates that measured in the amount of time working at the average hourly wage to earn enough income to purchase a washer-dryer combination, the “time cost” of those two appliances together has fallen by 83%, from 181.8 hours in 1959 to only 31 hours today.

What if we applied this kind of analysis to health care? The results are quite interesting. In 1958, per capita health expenditures were $134. This may seem astonishingly small, but it actually includes everything, inclusive of care paid for by government or private health insurers. A worker earning the average wage in 1958 ($1.98) would have had to work 118 hours—nearly 15 days–to cover this expense. By 2012, per capita health spending had climbed to $8,953. At the average wage, a typical worker would have to work 467 hours—about 58 days.

In short, while time prices for other goods and services had shrunk to less than one quarter of their 1958 levels, time prices for health care had more than quadrupled!

Of course, health care in 2012 is vastly different and greatly improved compared to what was available in 1958. But the same can be said of other goods and services (Perry, for example, is comparing the cost of an iPod to 4-speed automatic record player).[1]

This simple comparison reminds us of three basic truths. In general, private markets tend to produce steadily lower prices in real terms (e.g., in worker time costs) and steadily rising quality. This is exactly what we observe for goods such as toasters, TVs, iPods, washers and dryers. In contrast, while the quality of health care unequivocably has risen since 1958, real spending on health care has climbed dramatically. This isn’t an apples-to-apples comparison insofar as the bundle of goods and services that constitute health care is also much larger today than in 1958. In contrast, even though the quality may be better, a washing machine in 2012 is still a washing machine.[2] If we were willing to rely more on markets in medicine, we might be able to harness the superior ability of Americans to find good value for the money to produce results more similar to other goods.

Second, over time, we as a nation have been able to afford more health care precisely because the time cost of other goods and services has declined. For the same number of hours worked, workers can enjoy the same standard of living even as they allocate more of their working time to purchasing health care. There is nothing wrong with this. The only issue is whether we are getting good value for the money when we buy health care. With only 11 cents of every health dollar paid directly out-of-pocket, I think most of us can honestly say “no.”

Anyone who is skeptical on this point should do the following mental experiment: if I promised to pay 89 percent of the cost of your groceries, would what you buy be different? Most students I ask freely concede that they would buy things they would not otherwise buy and might well pay higher prices even for things they would have bought anyway. The difference between the cost of your weekly groceries when you buy them with your own money (say, $100) and what you spend when someone else is paying most of the bill (say, $150) is not pure waste. There is some added value to you from those extra groceries. But that value cannot exceed the added cost else you would have bought them on your own in the first place. The difference between that added cost and your own estimate of the added value is what an economist would call waste. According to the Institute of Medicine, we wasted about $765 billion in health care in 2009—about 30 percent of all spending.

Finally, this rate of increase is not sustainable. The time price of health spending cannot quadruple again over the next half century, else the average worker is likely to experience a decline in his or her real standard of living (i.e., what can be afforded after paying for health care). To paraphrase the former president of AEI, “we cannot make health care affordable by picking each other’s pockets.”[3] The sooner policymakers recognize this basic truth, the sooner we can get on a path towards sustainable growth in health care expenditures.

Update 1

Sarah Kliff had a nice follow-on piece in the Washington Post that elaborates on my chart and some possible explanations for why consumers are so much less cost conscious in health care.

Footnotes

[1] As well, one could argue that the average worker does not purchase the average per capita amount of health care since there are all sorts of cross-subsidies created by private and public insurance as well as U.S. tax policy. But at the end of the day, today’s health spending is financed by today’s workers, so if anything, the very rough picture I’ve provided is overly optimistic. On a per worker basis, total U.S. health spending this year will amount to $21,280, which would require an average-paid worker 1,108 hours of work to finance (and even more when taxes are taken into account). In reality, there are few U.S. workers who have to devote more than half a year to bankrolling their health care. The average hourly earnings figure I am using is only for production and nonsupervisory employees in manufacturing. Many other workers, including those in management and entrepreneurs, do not earn an hourly wage. And the costs of government-financed health care—which now accounts for more than 60 percent of health spending—tends to be borne more by those with the highest incomes.

[2] In fairness, when health economists have tried to measure the real prices of health treatments such as for heart attacks, they sometimes have found these have declined, though not nearly as rapidly as the decline in prices for goods and services analyzed by Perry.

[3] The original quote, from Christopher DeMuth, was “we cannot all grow wealthier by picking each other’s pockets.”

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The medical and dental patient cost explosion is less severe overseas, even in countries where their Q3 GDP was 7.1 compared to our “fudge factored” 1.1 and their currency exchange rate to the USD has shown our dollar droping 27 percent since the Bush era.

These factors apply to the Philippines where we have experienced unusualy good treatment at low costs the past three years, ex. in 2010 I was hospitalized for five days In Cebu at a total cost of $1,400 [USD]. This covered the ER, then a private intensive care room with a bed for my wife. The room had aircon and cable TV.

Nurses checked vital signs every hour on the hour and others [interns and students] visited in between. The assigned resident doctor and his assistant came in at least twice a day. My stay included ultasound scans of all vital organs, a full chest x-ray, medicines, and analysis etc.

The etc. included an unheard of [in the US] multi-tasking where they took care of an unrelated problem that was being mistreated in the states.

This year my wife had major dental work done in Quezon City for $1,950 [USD] that was quoted us at $9,300 [USD} by a local multi-office dental company. Her Medicare advantage plan would have paid a whopping $1,000 [USD] if the work was done here and $0 over there.

I have no dental coverage so I opted for the Quezon dentists who pulled one abscessed tooth by simple extraction, surgically removed three roots, recontructed a salvageable tooth, cleaned what was left, took bite-wing x-rays, made four upper and lower impressions, had a lab create semi-flexible partials; a five tooth upper and a four tooth lower. Total cost was $950 [USD].

WOW!!!

These examples show our affordable health care ambitions have a long way to go.

As American auto manufacturers learned decades ago, foreign competition can provide a much-needed stimulus to disruptive innovations and changing how business is normally conducted. I’m guessing that medical tourism will grow as patients dissatisfied with their own systems seek to obtain better value for the money elsewhere. Historically, that has meant many from other countries, such as Canada, coming to the U.S. to obtain care they could not obtain or could not obtain quickly in their home countries. But as your own experience shows, more and more Americans are going to foreign countries to obtain all sorts of medical care, including surgery. My guess is that Obamacare will accelerate the latter trend rather than dampen it.

Yep- odds are pretty good medical tourism will grow because you’re going to have to follow your doctor to Costa Rica if you still want to see that doctor. Thousands of doctors are going to quit or retire altogether from the US health system, and a great many more are going to go practice medicine in other countries to escape the coming state controls on healthcare in the United States.

Yes there is a small difference between the past and nowadays. Now we work few hours and we can afford buying a TV or other appliance, but in the past that was back breaking to earn for most needing things in life.

Excellent article. What you have to say here was understood in a sense by our Founding Fathers when they designed the federal government to be very limited and it’s the very thing the electorate has ignored for most of our country’s history, but most particularly when they were foolish enough to vote for Obama.

I certainly agree with your points about health care and the dramatic cost increase. In some senses, there has been an increase in quality, but not at all commensurate with the increase in cost. Of course, the increase in cost is very complex and involves factors that are outside of health care itself, but it seems to me that, at the root of the cost increase, is the fact that most health care expenditures are paid by third parties to the health care transaction, principally, the insurance companies and now, more than ever before, the federal and state governments. Payment for health care, unless the health care is required because of an injury by a third party, should not be paid by a third party (or his insurer). That means that regular health insurance and Medicare and Medicaid are the ultimate culprits for the cost increase.

I do believe that you are right that health care as we know it won’t survive another quadrupling. Perhaps we will experience the continual decline of quality of health care that England has experienced under NHS. Or maybe, despite Obamacare, the percentage of people who have any kind of health care coverage will continue to drop, or the costs of operating the health care systems become so high that there is a general collapse of health care from bankruptcies and people just leaving health care.

Some of the factors of this collapse are already in play. It’s increasingly difficult to get nurses to work in hospitals and, in hospitals, they generally work long hours and are spread very thin. Along with this there are growing expectations of patients with regard to outcomes and increasing willingness to blame others for problems that comes out as larger and more frequent malpractice claims against nurses as well as doctors. Why would a person want to work as a nurse or a doctor in such an environment and how can health care survive without them?

Our health care problems will not be easy to solve, to be sure, but we will never solve them by continuing in the present direction. I believe that, at the outset, direct payment by third parties to health care professionals and institutions must cease. Every dollar must be paid by the patient. If there are insurance or government payments, they must be to the patients. The next steps will be to get government entirely out of health care and frankly, I believe that health insurance itself ought to be outlawed.

I’m sure that what I am recommending sounds drastic and I do doubt that these things are not likely to happen, but I also know that what I have recommended is based on sound principles. Third party payers in health care always have vested interests that are in conflict with those of the health care professional and the health care institution and, especially, the patient. Specifically, the patient is interested in not dying and in living in good health and paying as little as possible to get that. Health care professionals and institutions are engaged by the patient to provide for his interests, so that is one of their interests, but they also have interest in making money for their goods and services and in protecting themselves from unwarranted patient expectations, which generally increases costs through otherwise unnecessary tests and procedures. The insurance companies have no real interest in the patient’s health care. Their interests are to collect as much premium as possible and pay as little in claims as possible. And governments? There is even less interest than insurance companies in the patient’s health care and even more interest in collecting of taxes and having those funds to borrow for use in doing other social programs and all and all to have greater control of and intrusion into all our lives.

The Perry analysis is interesting, but quite misleading because its basis, “time-cost”, is a static value in time, giving the impression that dollars in 1958 are the same in value as those in 2012 which is not the case. Infact comparing the ipod and 1958 stereo that actually cost 676$ in today’s dollars (CPI inflation calculator – Fed Statistics Bureau) only goes to show a measure of productivity and manufacturing improvements but not a lower cost. One could argue that by comparison, today’s worker is working harder to buy less.

Well, part of the point of the Perry analysis is to get away from the challenge of comparing prices over time. While it’s relatively easy to do for apples and oranges, price comparisons over time often are quite difficult to do for more complicated goods and services. That is, it is hard to figure out how much of an observed price increase is a “pure” price increase and how much instead reflects an improvement in quality.

So using worker hours to calculate what consumers have to give up in order to get something is a more intuitive way of seeing whether our standard of living is rising over time. In that regard, I don’t understand how one could conclude today’s worker is working harder to buy less. Perry’s figures clearly show that the average worker needs to work many FEWER hours to purchase goods and services that unequivocably are higher quality than those our parents or grandparents bought a half century ago.

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